Brainstorming Income Inequality

American income inequality has skyrocketed over the last 30 years, as compensation for the wealthiest Americans has grown while wages have stagnated for the middle- and lower-classes. Incomes for the wealthiest 20 percent of Americans are now eight times higher than incomes for the bottom 20 percent, according to a study from the Center on Budget and Policy Priorities and the Economic Policy Institute. The gap between the rich and poor has grown because incomes for the top 20 percent grew at an annual pace that exceeded the total growth of incomes for the bottom 20 percent over a 30 year period.

A better title might be simply “Income Inequality Has Skyrocketed In The Last 30 Years” because their answer to “Why?” is that the incomes of the highest earners has grown faster than those of the lowest earners which isn’t a great deal more than a restatement of the thesis. It leaves me wanting more. Why have the incomes of the highest earners grown faster than those of the lowest earners?

I think that increasing income inequality in the United States is deplorable for several reasons:

High earners have the ability and incentives to employ lobbying to get even more income.

Low earners have incentives to demand policies which will make matters worse.

A country with a relatively small number of very rich people, a large number of rather poor people, and not a great deal in between is not the country I grew up in, is not what I expected, and is not what I want.

In the interests of exploring the question in a little more depth, let’s brainstorm it. Please list the explanations you think are most likely explanations for increased income inequality. Don’t defend them (although you may be asked to defend them later) or criticize the explanations provided by others. If you don’t think that increasing income inequality is a problem, say that. If you think that increasing income inequality is a problem but nothing can be done about it, say that. This is brainstorming. I’ll start. In no particular order:

Poor people immigrating into the country.

Currency manipulation by the Chinese, Japanese, and others.

The amount of total compensation being taken in the form of healthcare insurance means that income is a misleading measure.

Large subsidies paid to the healthcare and financial sectors.

Barriers to entry in and protection to sectors and jobs in which incomes are rising.

Intellectual property law that is balanced in favor of owners rather than creators.

Your bullet points at the end captured the stuff that spring to mind immediately.

Assortative mating is particularly interesting, as one would have to suss out impacts of other cultural changes. Okay, doctors marry doctors now instead of nurses. How much of this change is possible because we’ve expanded the effective pool of potential doctors by allowing women, in particular, to seek those positions?

Have salaries in certain healthcare areas exploded because of increased specialization? Has this occurred in other fields?

Have demographic changes had an impact? As the Boomers make their way through the alimentary system of US history, are they distorting changes wages? A large chunk of people coming into the workforce might slow wage growth at the start of their careers, but as they go through their middle years (and reach prime earning power) they might smooth things out. The historic anomaly of US primacy after WWII might have muted the impact of their ability to diminish wages at the start of their careers. (This idea of changing wages by demographic bulge seems very weak to me.)

Demographic changes can have other impacts. As Schuler used to mention frequently, all those Boomers starting families were out buying houses, a great many of which HAD to be new. They moved to better houses over the course of their lifetimes. All of that would have driven both a residential and commercial real estate boom. Generations coming after might not have been able to fill the void, and certainly weren’t going to keep expanding the housing market indefinitely. When the boom goes away, it feels like a bust if everyone’s economic models are based on the idea of permanent boom times.

And all of that is enough. I’ve got to get back to that damned toilet now. Turns out one of the reasons I’m have so much trouble is because Kohler realized they didn’t need to make three bolt tanks to attach to the bowls anymore. Naturally I’ve got an old three bolt tank, and I’m scrounging for parts, which is compounded by the fact that others have done so before me. I’d replace the whole damned thing if I had the money. Grrr. But all of this has been learned slowly, and by that worst of task masters – experience. If I’d known all this at the start….

Oh, one thing I touched upon briefly but didn’t draw out completely: How much of the old situation was an accident of time and place because the USA passed unscathed* through WWII, and everyone else got clobbered?

* From a production standpoint. Obviously losing 400,000 dead and many more wounded had an impact. Even there, however, we suffered much less than all the other major combatants, and even less than many of the minor ones. And I mean in absolute terms. In relative terms we really got off light.

1) Decrease in tax rates, especially cap gains and dividends, so that the wealthy got wealthier faster. Compound this by having those wealthier people investing in financial products and not job producing ventures.

2) Brain drain of best students going into FIRE sector.

3) Technological developments leading to the need for fewer workers. Labor market is in excess.

4) Cultural/legal changes that made it acceptable to pay management salaries well out of proportion to their value.

5) Need for capital in emerging economies makes it less available here.

6) Rising costs for the important stuff, i.e. housing, medical care and education.

7) The rise of specialty prep programs and private schools that virtually guarantee the kids of the well off will get into the selective schools that make it easier to succeed. Look at the pre-school programs in Manhattan.

8) Wealth/inequality is self-perpetuating. The influence gained in the media and politics makes it more difficult to address the issue and makes it easier to maintain. Much of what happens to maintain that inequality is not even know by most people. For example, exempting derivatives from clawbacks. Who does that benefit? How many people even know such a law was passed?

9) Drug laws, selectively enforced, that guarantee more of the poor stay poor.

1) rent seek, lobby, repeat
2)”Financial Innovation” as code for taking money from people as stupid tax (credit cards, payday loans)
3)Being “poor” is not really poor. You may eke out a comfortable existence in a lot of places on 12-20k. Not a lot of incentive to make more.
4)Aging population whose declared income may be low but it does not include asset sales

I agree with much of what you listed, Dave. Icepick always adds cogent perspective. And, Steve, who I disagree with much of the time, has me supporting #4, 6, 10 of his post.

Additionally I would expand on the idea of education being an underpinning for some of the great economical divide. We don’t really update our academic programs to meet the needs, or even the unfolding differences and/or requirement of our current student population.

In the push for college education, hands-on education, dealing with metal, automotive, carpentry skills, have been done away in most high school curriculums. Similarly, trade schools have been somewhat stigmatized, as a student’s first choice to pursue after their K-12 education, despite the tremendous benefits such training would offer some, in gleaning a good-paying job. The article posted, in the previous thread, demonstrates a paucity of such skills, in the marketplace, to meet the needs of available manufacturing jobs.

The union grip on education is also self-limiting in changing the classroom atmosphere to be more conducive to learning. In many non-unionized, private models there has been enormous growth in the classroom experience, with no real differences related to socioeconomic factors — it’s all in the teaching methods, a stronger curriculum and higher standards of behavior expected in these other academic formats. If we could at least tame or eliminate the unions in our schools, public schools could improve and become competitive in ways that would bring more students into the public school sector, rather than seeking private education as a more viable means.

I would also add the following as helping income equality:

* Reforming the tax code, making it less convoluted and with fewer tax shelters.

* Regulatory reform, creating a less bureaucratic rat-maze for small business start-ups or cottage industries to flourish.

* Reform Dodd-Frank, or start over, with new banking regulations that provides an even hand to lending from smaller banks, rather than simply securing the fate of banks too big to fail.

* Reform SS and medicare, means-testing for those who don’t need it, and raising threshold ages to reflect current longevity stats.

* HC should have patient involvement as to costs incurred. Anything ‘free’ usually does not cultivate accountability from a consumer. There should be monetary incentives to pursue a healthy lifestyle, as there is in car insurance. Tied in with this should be tort reform to discourage specious lawsuits, bringing down malpractice and healthcare costs.

One contribution would be the winners of the various busts. Somebody gets screwed, and they wind up with a lot less money. Somebody gains those loses. This is facilitated by the increased money supply and debt.

One contribution would be the winners of the various busts. Somebody gets screwed, and they wind up with a lot less money. Somebody gains those loses. This is facilitated by the increased money supply and debt.

That’s an interesting observation. I wonder if increasing the money supply, coupled with the ordinary working of the economy, of itself would lead to increased income inequality.

@Andy- Dont think so. It seems to be cyclical. It seems to peak, there is an economic shock, then it pulls back some or there is a revolution. As Mao said, sort of, it is still too early to tell how this will work out in a democracy.

I forgot to mention a loss of balance between creditors and debtors. It has become increasingly difficult for creditors to lose money no matter how risky their loans.

I’m looking at it from a very long view – back to Roman. Over the course of human history, great disparities in wealth and income have been the norm, but under the right circumstances, income/wealth can be a lot more equal.

Here’s another theory to add to the brainstorm.

It’s all because of the bubbles. If you look at Saez’s famous graph and think about when our economy “grew” through bubbles, I think there’s a strong correlation. The implication is that the wealthy benefit from bubble-based growth much more than everyone else.

3) Technological developments leading to the need for fewer workers. Labor market is in excess.

I don’t think this is a major source of income inequality since it has been true for a long time. For this to be true technology would have to be replacing labor everywhere for which I’d like to see evidence.

Wealth/inequality is self-perpetuating. The influence gained in the media and politics makes it more difficult to address the issue and makes it easier to maintain.

This needs to be refined, income inequality is self-prepetuating when you have an activist government. When you have an activist government then rent seeking becomes considerably more possible and attractive.

Also, note that rent seeking is far less likely to produce jobs. The reason is that rent seeking is not a productive activity. It is merely re-cutting the “economic pie” not necessarily expanding it. So the rise in rent seeking is likely also coupled not only with income inequality, but also slower economic growth. Countries with more rent seeking than other countries with less will likely grow slower (all other variables being roughly the same).

From your link steve,

But we keep pointing out that – instead of imposing draconian austerity – it would be much better for the economy to stop handouts to the big banks, stop getting into imperial military adventures and stop incurring unnecessary interest costs (and see this). That infuriates our conservative readers.

Heh, this is one thing I agree with, but you don’t (handouts to big banks). Ironic you are linking to them.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise. . . .

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse….

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. . . .

GM, Chrysler, AIG, Citibank and so on. Seems pretty telling to me.

Oh and by the way…what is income inequality like in third world banana republics? I highly recommend that link, it is wonderfully depressing.

By the way Michael you reading this? Care to repost that love letter you wrote a few weeks ago about Obama and GM…lawl….